oaktree insights june 2018

special edition: it’s not supposed to be easy how oaktree strives to add value in uncertain times

333 s. grand ave 28th floor, los angeles, ca 90071 | (213) 830-6300 | www.oaktreecapital.com it’s not supposed to be easy: how oaktree strives to add value in uncertain times by Jay Wintrob

One of our favorite stories around Oaktree is that Charlie Munger once said to Howard that investing is “not supposed to be easy. Anyone who finds it easy is stupid.” Charlie was of course speaking generally, not specifically about uncertain times like these.

It has been more than nine years since we reached the bottom of the credit and equity markets during the last global financial crisis. Uncertainty is high, risk-taking is high, dry powder is high, competition to buy assets is high, liquidity is high, prices are high and interest rates are low – and so prospective returns are low, and we think risk is high. This is really a time when delivering exceptional investment performance isn’t easy.

Achieving superior investment results in times like these requires that you add value to your investments. That’s why we recently assembled some of Oaktree’s most valuable assets – our senior investment profes- sionals – to discuss how they influence outcomes and add value to their portfolios. They are drawn from nearly 30 Oaktree employees across half a dozen investment strategies who are dedicated to operational improvement and performance enhancement at the investment-, company- and platform-level, along with more than 90 senior advisors with an operational focus who are affiliated with these strategies.

Our discussion ran through various actual scenarios – from situations where we have total control of a company to just a minority stake – and it readily became apparent that there is no set formula for adding value to an investment or portfolio. Every investment opportunity is unique – and in each case we must implement a bespoke solution that adds value by addressing the specific circumstances at hand. But, still, certain themes did emerge, and here’s my take after listening to my colleagues riff on investing in a high-risk, low-return environment.

unlocking paralyzed companies able to do anything with the business. So Oaktree took a leadership role among the lenders in an effort Managing paralysis – freeing up energy and unleashing to turn things around. Our goal is to unlock value by companies that are in lock-down mode – is an Oaktree creating and executing a strategy, by taking the reins specialty and a skillset that lets us focus on creating of the business.” value for our investors. In many cases, the companies we’ve invested in took on too much debt, the business leveraging reputation turned sour, and then the companies totally froze up because the management team had no room to All investors want to buy assets early and at an maneuver. attractive price. That’s not easy in today’s market, as Michael Cardito, co-portfolio manager of our Power Chris Boehringer, co-head of our Distressed Debt Opportunities strategy, reminded us when describing group in Europe, pointed out that “we often come how his team leverages their role as strategic, val- across companies immobilized because they are ue-added partners to help them deploy capital in this controlled by too many lenders. There was, for challenging environment. example, a European company we once got involved in that was controlled by 194 debtholders, most “Most of us believe that the market for the types of of which were banks. They couldn’t agree among companies we pursue is somewhat efficient today. themselves about what management should do to That is, it’s hard to find ‘bargains’ or to ‘buy low’ in move the business forward.” the traditional sense,” Michael said. “However, we think of buying low and selling high in a different The company, Chris said, “was in the dangerous throes way, based on how we’re able to add value to our of being completely incapacitated. It had no strategy, companies. We benefit not only as their financial and management was in handcuffs in terms of being performance improves, but also when we’re able to - 2 - sell companies for higher multiples of EBITDA than the value of avoiding disaster and those at which we bought them.” protecting the downside

But that doesn’t mean ‘buying low’ isn’t possible – A reputational advantage can also help create value in even in today’s market. A skillful investment manager a way that isn’t apparent. Adding value not only ma- can at times acquire assets cheaply by making use of terializes from how wisely and inexpensively Oaktree its sterling reputation. secures an investment, but sometimes in the problems and costs our portfolios manage to avoid. In 2016, Oaktree’s Power Opportunities group acquired a mid-sized business from a family in a loose We believe this is accomplished through maintaining auction process. “We know for certain that they had vigilance, executing hands-on management, and offers $40 to $50 million higher than ours, which was utilizing the wisdom gained over the years of actively roughly 20% of the purchase price,” Michael said. managing and transforming businesses. It’s hard “We believe they chose Oaktree in the end because of work, but it can be done. our ability to add value to their business, and we were able to convince them that the substantial equity they Ryan Delaney, head of asset management for our Real rolled over would be worth much more in partnership Estate strategies, gave a terrific example of how we try with us than with anyone else. That difference more to create value by avoiding problems. “We bought an than offset our lower upfront .” What that office building in Boston,” he recalled, “and within means, in concrete terms, is a couple of weeks our partner that we acquired the business relayed to us that its old leasing at arguably 20% less than the “We think of buying low and broker was taking legal action company’s market value. selling high in a different way, against us. Our bread is buttered by leasing brokers, and so I Similarly, Jean Rollier, who based on how we’re able to add thought, ‘How is a leasing broker heads the Portfolio Enhance- value to our companies." disgruntled with us? How did we ment team within our European get ourselves in such a situation?’ Principal group, pointed out - Michael Cardito, Co-Portfolio Manager, I knew this leasing broker; they’re that our expertise in spearhead- Power Opportunities working on another building ing operational improvement we own, bringing us a ton of can put us in a stronger position activity. I jumped in, talked to to access proprietary deals. Jean recalled the case of the leasing broker, flew out to Boston and had dinner the European helicopter business we acquired where, with them. I finally understood what was going on. originally, we didn’t have a stake. His issue really was with our partner in the building. Our partner was viewed in the market as someone “One of the shareholders reached out to us,” Jean said, people didn’t want to do business with. To solve the “because they believed we were credible, and that by problem, I became the face of the building with the teaming up with us in the new , we brokerage community. As a result, we leased 40% of would be able to help bring about change and drive that building in the next 18 months in a down market. performance.” With that activity, the building was stabilized and we then sold it for a profit.” Chris Boehringer chimed in with his own example from the Distressed Debt group, a case where we In other words, smart investment firms are always were invited in by the banks. “We didn’t have a stake on the lookout for future downside, because there is in the company. We owned some assets that the value in spotting trouble before it rears its head. This company was managing. But it was a company in is a good example of controlling risk. But a firm can paralysis, and the banks wanted somebody involved only develop that skillset if it has highly experienced who understood that industry and asset base. And managers it can rely on. David Tanner, a managing they effectively forced the 30-plus funds who director who heads up our Portfolio Transformation owned stakes in the debt to let Oaktree sponsor that team within the Special Situations group, is one such business.” professional. David revealed a technique he relies on to spot future trouble: he closely watches executives’ behavior when they’re under pressure.

- 3 - “I’ve seen many an ethical executive,” David said, get there. At the end of those two years, however, “that once they start underperforming and feeling the we got the financial benefit from the operational pressure, the lines tend to bend and the sales forecasts improvements at the beauty business, and we were get more aggressive – and they’re still sure of them. able to the healthy pharmaceutical assets.” You’ve got to take a hard look at how people change Oaktree’s teams hunt down opportunities for oper- when they’re under a lot of pressure and read the ational improvement – wherever we can find them. signals you’re getting out of them. It’s human nature, Alison Endemaño heads up our Human Capital frankly, to not want to be seen as failing – and you’ve division within the European Principal group and is got to watch out for signs that people are hiding an expert in the tools we’ve developed to assess how potential failure from you.” healthy an organization is – based on our analysis of the firm’s leadership, culture and the dedication of its the art of making operational employees. improvements Alison said, “We’ve developed, for example, a very At Oaktree, we believe operational improvement – simple and effective ten-question engagement survey broadly defined – is critical to adding value to both that determines how inspired employees are by their control and non-control investments. No matter a company. One of the questions we ask is, ‘Would you deal’s size, location or industry, even the best-inten- recommend this as a great place to work?’ Things are tioned and best-thought-out plan for operational seriously wrong if employees are telling outsiders the improvement stands little firm isn’t a good place to be.” chance of success if the firm executing it lacks operational “Operational improvements Oaktree recently acquired an IT experience. Thus, we focus a outsourcing business in Eastern great deal on putting the right provide much-needed downside Europe and translated our hu- people in the right positions, protection" man-assessment tools into the local and the right governance and - Ryan Delany, Managing Director, language; we were able to get all oversight in place in each the IT firm’s staff to answer the company, business or asset Real Estate ten engagement questions. “There we get involved with. were two areas where engagement was dangerously low,” Alison recalled. “One of the This is particularly relevant as we head into a period of sites was actually responsible for a key account. So we rising interest rates. As Ryan Delaney pointed out, could see there was risk. Here was a team of people “operational improvements provide much-needed with low engagement – and they were responsible downside protection, because the more you are able for 40% of total revenues. We shared that fact with to increase net operating income, the less susceptible management. They pretty much had no clue how you are to interest rate risk.” that team felt. So we were able to put a plan in place to turn the team around and to reengage them in the Jean Rollier precisely laid out how we make opera- overall direction of the business.” tional improvements, reminding us what happened when we bought a global packaging business on the the value of working with the continent. “One part of the business served the beauty management team you inherit industry and was struggling. The other business served the pharmaceutical industry; it had healthy margins David Tanner shared with us his experience in turning and good growth prospects, but because it was joined around a sports apparel and accessories company. at the hip with the ailing cosmetics business, we “This is an industry that is notoriously too cool,” couldn’t leverage its profitable assets. The combined David said. “Guys who surf and skateboard, and a multiple was very, very low – given the operational culture around that which was undisciplined, not issues we had in the cosmetics business,” Jean said. fact-based, not data-oriented, loosey-goosey on cost controls.” In this case, they crucially needed to make Jean’s team came up with a robust operational business decisions based on hard data. So Oaktree plan to help turn around the cosmetics business showed the management team what for them was a that included separating out the pharmaceutical different approach to decision-making. operation. That was no small task. Said Jean, “We had to build a new plant and pull together a full “They had never seen the discipline that the Oaktree new management team. It took us two years to team brings to bear, the analytics on both the deal side - 4 - and the operating side. Over the two and a half years we’ve been involved, the pendulum of the company and of the culture has completely moved. It’s still got that great vibe and spirit, but at the same time, people know they can’t come into meetings with us without their fact-base down. They know they can’t tell us one thing one day and not deliver it the next day, because they know we remember these things.”

David’s got it absolutely right, I thought, when he pointed out how changing the culture of a firm is “extremely challenging” work. “It’s easy to change out management teams and think that’s going to be the solution,” David said, “but in this situation, it’s really tough to get someone who culturally fits in the action-sports space – which is important to the brands. We’ve had to work with a lot of talent that’s in there and change the culture through the techniques we specialize in.”

As Charlie Munger told Howard, it’s not supposed to be easy. Thankfully, there is one thing we can count on: all of our key constituents – from our clients to industry partners to the management teams working with us to help turn their companies around – rely on Oaktree to add value, be creative, think long-term, act with integrity, roll up our sleeves and work side- by-side with them and to embrace the fact that hard work and adding value is often essential for successful investment outcomes.

- 5 - biographies jay wintrob Chief Executive Officer Mr. Wintrob is Oaktree's Chief Executive Officer and has served as a member of the Board of Directors since 2011. Prior to joining the firm as Chief Executive Officer, he was President and Chief Executive Officer of AIG Life and Retirement, the U.S.-based life and retirement services segment of American International Group, Inc., from 2009 to 2014. Following AIG's acquisition of SunAmerica in 1998, Mr. Wintrob was Vice Chairman and Chief Operating Officer of AIG Retirement Services, Inc. from 1998 to 2001, and President and Chief Executive Officer from 2001 to 2009. Mr. Wintrob began his career in financial services in 1987 as Assistant to the Chairman of SunAmerica Inc., and then went on to serve in several other executive positions, including President of SunAmerica Investments, Inc. overseeing the company's invested asset portfolio. Prior to joining SunAmerica, Mr. Wintrob was with the law firm of O'Melveny & Myers. He received his B.A. and J.D. from the University of California, Berkeley. Mr. Wintrob is a board member of several non-profit organizations, including The Broad Foundations, the Doheny Eye Institute, The Los Angeles Music Center and the Skirball Cultural Center.

michael cardito Co-Portfolio Manager, Power Opportunities Mr. Cardito is a managing director and co-portfolio manager of Oaktree's GFI Energy Group, which executes the Power Opportunities investment strategy. He is responsible for the overall management of the group and its investing activities, including setting investment strategy, sourcing and executing investment oppor- tunities and board oversight of the group’s portfolio companies. He currently serves on the board of Fidelity Engineering Corporation, Solomon Corporation, MaxGen Energy Services, Trench Plate Rental Co. and Sterling Lumber Company, and previously served on the board of Shermco Industries. Mr. Cardito began his investing career at The Beacon Group, a New York-based advisory and firm, and since then has been primarily focused on control private equity investing in energy, power and niche industrial sectors. Prior to joining Oaktree in 2011, he was a principal with Harvest Partners, LP, a New York-based private equity firm, and before that was a vice president with Nautic Partners, LLC, a Providence, Rhode Island-based private equity firm. Mr. Cardito received a B.A. degree in economics from Colgate University and an M.B.A. from Harvard Business School.

chris boehringer Managing Director, Distressed Debt, and Co-Head of Distressed Debt Europe Prior to joining Oaktree in March 2006, Mr. Boehringer spent two years at Goldman Sachs in the European Special Situations Group. Prior to Goldman, he was co-founder and director of FITravel Corporation, an internet-based distribution system for travel products. Prior experience includes five years in Leveraged Finance at Warburg Dillon Read/SG Warburg and two years at LTU GmbH & Co. Mr. Boehringer holds a B.A. degree in economics from Harvard University and an M.B.A. from INSEAD in France, where he graduated with distinction and was the recipient of the INSEAD Canadian Foundation Scholarship. Mr. Boehringer is proficient in German, French and Japanese.

ryan delaney Managing Director, Real Estate Mr. Delaney joined Oaktree in 2012 after having spent six years as a Principal and Head of Asset Management at Mesa West Capital, a Los Angeles based commercial real estate finance company. Prior experience includes five years in the Global Recovery Management Group at Credit Suisse First Boston (“CSFB”), where he was responsible for the workout of special situation assets including distressed real estate, syndicated bank debt and the of asset-backed transactions. Mr. Delaney began his career in New York in the Analyst program at CSFB in 2001. He holds a B.A. degree in economics from Hobart College, where he was elected to Phi Kappa.

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jean rollier Managing Director, European Principal Prior to joining Oaktree in 2007, Mr. Rollier spent two years at The Boston Consulting Group in the Paris office. Before that, he handled various managerial roles in France, in the United Kingdom and in the United States, working for tier-one automotive suppliers. Mr. Rollier received an M.Sc. degree in mechanical engineering from Arts et Métiers ENSAM and an M.B.A. from INSEAD. He is fluent in French.

david tanner Managing Director, Special Situations Mr. Tanner leads the Portfolio Transformation Team (PTT) – a group of operating executives that specialize in partnering with portfolio companies to drive performance improvement. Throughout his career, Mr. Tanner has led improvement efforts in over 30 companies globally in the consumer, industrial, healthcare, and technology sectors; including more than a dozen turnaround situations. The PTT has the capabilities to serve the full breadth of industries and functions, offering advisory services and interim management in areas such as turnaround leadership, operational restructuring, commercial transformation, cost rationalization, corporate strategy, talent management, governance implementation and due diligence. Prior to joining Oaktree in 2011, Mr. Tanner held a number of senior executive roles at Fortune Brands, Inc. Most recently, he was Senior Vice President of Strategy and Corporate Development charged with leading the turnaround of Fortune’s then largest portfolio company, Beam Inc. Previously, Mr. Tanner drove M&A activities across Fortune’s portfolio in the alcoholic beverages, building materials, sporting goods and sectors; led their corporate strategy efforts; and managed a range of performance improvement initiatives across Fortune’s portfolio companies. Prior thereto, he was a member of the Strategy and practices at McKinsey & Company, Inc. where he worked with Fortune 500 companies and private equity firms on strategy and operational improvement efforts. Earlier in his career, Mr. Tanner served as a Major and Senior Pilot in the United States Air Force, including serving in Iraq. He currently serves on the boards of Boardriders, Coriant, Agro Merchants, and Hanley Wood. Mr. Tanner received a B.S. in operations research from the United States Air Force Academy and an M.B.A. with honors from the Wharton School of the University of Pennsylvania.

alison endemaño Senior Vice President, European Principal Ms. Endemaño joined Oaktree in 2014 with over 15 years of experience in Human Resources leading change and managing talent in the UK, Europe, Middle East and the U.S. As a senior vice president in our European Principal Group, she focuses on talent attraction and HR management across its portfolio. Ms. Endemaño began her career in corporate tax at Arthur Andersen where she qualified as a Chartered Accountant (ICAEW), and then spent two years with the Human Capital Services consultancy business. In 1998, she joined 3i plc for eight years as a senior HR leader focusing on the company’s international expansion. In 2006, Ms. Endemaño moved to Bausch & Lomb, where she successfully led a cultural change program raising both capability and accountability through various performance and talent management initiatives. In 2009, she became an independent consultant providing strategic and operational HR consultancy services to a range of SME and corporate clients. In 2010, one of her corporate clients, Ramboll, invited her to join them as the interim Head of HR for the UK and Middle East leading the HR integration of 1,100 people arising from the merger with Gifford LLP. This assignment was successfully completed in 2012, following, which, Ms. Endemaño completed an assignment with a Phoenix Equity Partners-backed start-up, Global Navigation Solutions, completing three acquisitions in the marine sector. She earned her B.A. degree in management from Aston University and an M.A. in human resources management from Kingston University. Ms. Endemaño is both a Fellow of the Institute of Accountants in England & Wales and a Chartered Fellow of the CIPD.

- 7 - notes and disclaimers

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This document contains information and views as of the date indicated and such information and views are subject to change without notice. Oaktree has no duty or obligation to update the information contained herein. Further, Oaktree makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.

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